Reading: Lesson 3 – Opportunity Cost

Lesson 3 – Opportunity Cost

 

Description:

All choices have a cost. Opportunity cost is simply the next most preferred alternative that is given up when a choice is pursued. When faced with a choice, entrepreneurs should consider the concept of opportunity cost to help inform their decision.  

In this lesson, students will watch a video and read an article on the fundamental economic concept of opportunity cost. Students will then complete an activity in which they will apply the concept of opportunity cost.

 

Time Required:

45 min

 

Required Materials:

Internet connection, writing instrument

 

Prerequisites:         

Lesson 3.1 - Scarcity, Choice, and Tradeoffs

Lesson 3.2 – Thinking at the Margin

Lesson 3.3 – Opportunity Cost

3.3.A – Watch and discuss the following video using the questions below to guide your discussion [10 min]:

Video: (Learn Liberty, 3:56 min)

“Prof. Mario Villarreal-Diaz explains that scarcity is inherently a part of human life, and how this necessarily implies a world of tradeoffs.  In such a world, the pursuit of a choice requires forgoing all other potential choices.  Opportunity cost is simply the next most preferred alternative that is given up when a choice is pursued.”

Discussion Questions: Opportunity Cost

1.  What is the basic economic problem?

a.      The basic economic problem is the problem of scarcity. There are limited resources to satisfy our unlimited wants.

b.      Because of scarcity, we face the reality that there are limits to what we can do.

 

2.  What is opportunity cost? Explain the concept using the example of a student attending college.

a.      Opportunity cost is the value of the best alternative forgone, i.e. what is given up when we make a choice.

b.      Professor Mario Villarreal-Diaz explains it as “The value of what you have to give up in order to pursue a choice.”  

c.      If a person chooses to attend college, the opportunity cost would be the next best alternative of how they could have spent their time or money.  

·        For example: The student may value working and earning money. If they choose to give this up to attend college the student’s opportunity cost would be money they could have earned from working.

·        If the student valued having leisure time as the best alternative and chose to attend college, their opportunity cost of attending college would be large amounts of free time for leisure.

·        The student may value purchasing a new car as the best alternative to attending college. If they choose to pay for college instead of purchasing the car, the opportunity cost of attending college would be the new car.

 

3.  What do economists mean when they say all choices have a cost?

a.      Opportunity cost occurs because we have limited/scarce resources and unlimited wants. We cannot have all of our wants satisfied at once, therefore we choose to satisfy some wants and forgo others. Every time we make a choice about which want to satisfy, we are also choosing what alternatives to forgo in order to satisfy that want. The cost of the choice is the forgone alternative, or what economists call, the opportunity cost.

b.      Professor Mario Villarreal-Diaz explains, “Economists aim to understand how people make tradeoffs when they are faced with different choices and committing themselves to a different course of action.”

3.3.B – Read and discuss the following article using the questions below to guide your discussion [15 min]:

Article: Opportunities and Costs by Dwight Lee (FEE.org)

“Because of scarcity, everything we do involves sacrifice….Only when the costs of choices are imposed on those who make those choices can we best use the opportunities available.”

Discussion Questions: Opportunities and Costs

1.  What does the author mean by the statement “The bright side of costs is the opportunities that create them?”

a.      Having more economic freedom increases the choices and opportunities available for people and thereby increases opportunity costs. This is not a bad thing! It just means that people have able to choose between better alternatives.

b.      Professor Lee explains, “The limits of scarcity create costs only when there are opportunities.”

c.      Every choice has an opportunity cost. If people did not have to make choices, they would incur no costs but would also be worse off. For example, if “I am forced to live in a particular house, take a particular job, marry a particular woman, and consume a set bundle of goods, I incur no costs when I do those things.”

 

2.  What are special interest groups?

a.      Special interest groups seek to acquire benefits for themselves paid for by the general public.

b.      They are people or organizations seeking or receiving special advantages, typically through political lobbying (someone trying to persuade legislators to support a business or a cause).

c.      Attempts by organized groups to capture more public money.

 

3.  When special interest groups lobby for political favors from government, why might they prefer we ignore the opportunity costs associated with their receiving of those special benefits?

a.      All money the government provides to special interest groups must first be taken from the productive private sector in the form of taxes. For every political program that is funded, something else we value now cannot be funded. Special interest groups prefer that we do not consider the alternative ways our scarce resources might be used in attempt to capture a larger share of money for their own benefit.

b.      There are no perfect solutions to the challenges we face. All solutions involve tradeoffs. When alternatives are poorly considered, resources are directed away from productive activities and into less productive, politically favored, activities. Opportunity costs should always be considered so we can make more informed decisions about ways to use scarce resources in ways we value, especially when it comes to handing out political favors

3.3.C – Complete the following activity and share your ideas with the group [20 min]:

Activity: Everyday Costs and Benefits

Every decision we make entails benefits as well as costs. These costs take two forms: a transaction cost is one involved in the actual performing of an action (for example, going to the grocery store: the cost of gas to get there and the cost of your groceries), and opportunity cost refers to the value of the next-best alternative that was given up with you make a choice.

Teacher Tip: Remind the students to consider what they could be doing to develop their business ideas from Module 1, Lesson 3.

In this activity, students will list the typical activities they engage in after school on a regular basis. Students should then list the transaction costs, benefits, and opportunity costs of each activity (the table below is a suggestion for how they can make their lists). Students will have 10 minutes to make their lists.

 

	Activity	(Transaction)       Costs	Benefits	Opportunity      Costs
1
2
3
4
5

 

Teacher Tip: In the remaining ten minutes of class, ask students to share some of their most interesting or humorous examples of opportunity costs. What, if anything, could they give up to focus on developing their business instead? What would be the opportunity cost of that choice?

Lesson Recap

·        Every decision to use a scarce resource has a cost. The cost is the value of the next highest alternative that has to be foregone as a result of your decision. In other words, the opportunity cost is the value of the best alternative forgone.

 

·        Scarcity is an unavoidable part of life. We live in a world where we are forced to make choices, and these choices always involve tradeoffs.

 

·        The evaluation of choices and opportunity costs is subjective. Individuals have different values and preferences. As a result, opportunity costs are unique for each individual decision.

 

·        Opportunity costs should always be considered so we can make more informed decisions about ways to best use our scarce resources, including our time.

  

Additional Resources

Article: Private Property and Opportunity Costs by Dwight Lee (FEE.org)

“Private property is essential to the cooperation that emerges from market interaction, because it ensures that people consider the opportunity cost of their actions. It is both sad and ironic that so many people blame private property for problems that exist because of the lack of private property.”

                                                                                                                                                             

Article: The True Price of a Hybrid by Paul Cwik (FEE.org)

“Environmental economics is a fascinating field. It attempts to assure that people confront the full costs of their decisions about what to produce and what to buy. Better than any government bureau, the price system communicates which methods of production are least costly. If we want to be environmentally friendly, all we need do is follow the market and compare total costs. The market abhors waste.”

 

Podcast: Ticket Scalping and Opportunity Cost EconTalk (29:45 min)

“Michael Munger of Duke University and Russ Roberts talk about the economics of ticket scalping, examining our reactions to free and found goods, gifts, eBay, value in use vs value in exchange, and opportunity cost.”

Article: Getting the Most Out of Life: The Concept of Opportunity Cost by Russell Roberts (Library of Economics and Liberty)

“To get the most out of life you have to think like an economist, you have to know what you’re giving up in order to get something else.”

 

Article: Opportunity Cost by David R. Henderson (Library of Economics and Liberty)

“When economists refer to the “opportunity cost” of a resource, they mean the value of the next-highest-valued alternative use of that resource. If, for example, you spend time and money going to a movie, you cannot spend that time at home reading a book, and you can’t spend the money on something else. If your next-best alternative to seeing the movie is reading the book, then the opportunity cost of seeing the movie is the money spent plus the pleasure you forgo by not reading the book.”